Economic Impact from China's Flooding Grows

After weeks of torrential rain across central and southern China, the mainland has suffered from a series of devastating floods. As the total price tag has soared, the impact will be felt in economic growth.

By mid-July, almost 240 people had lost their lives and nearly 100 were missing, as China’s floods had been compounded by Typhoon Nepartak and a violent tornado. Torrential rains affected 33 million people in 28 provinces, submerging huge areas of cropland.

Another round of heavy rain over the last week left some 200 people dead, including 130 in Hebei province.

One of the costliest weather disasters in history

Only days ago, President Xi Jinping emphasized the importance of early warning systems in flood-prone areas and warned officials about delays.

As the total economic toll is estimated at more than $22 billion, China’s devastating floods represent the 5th costliest non-US weather disaster on record. Only the 1998 floods, which resulted in losses of $44 billion (in 2016 dollars), have been more damaging.

Economic growth is very sensitive to adverse impact on roads, rails and other damage on supply disruptions, which can result in shortages. As transport infrastructure is paralyzed or impaired, factories close their doors in industrial provinces, along with offices in post-industrial cities.

Fruit and vegetable prices usually rise in flooded regions, where prices are now monitored closely and price controls implemented as needed. In June, consumer price index (CPI) recorded growth of 1.9 percent year-on-year.

Pork prices played a major role in annualized price increases, adding some 0.7 percentage points to the headline figure. That’s hardly surprising since the seven provinces that were worst hit by the floods account for more than a fourth of all hogs in China.

Downside risks in summer, rebound in early fall

Flooding patterns reflect monsoon seasons. Heavy rains in China occur along the seasonal Mei-Yu (“plum rains”) front extends from eastern China across Taiwan into the Pacific south of Japan. Associated with the southwest monsoon, these rains typically affect southeastern China from mid-May to mid-June and northern China during July and August.

Severe floods tend to have a substantial impact on agricultural output, which is reflected by the CPI, due to heavy food weightings in the inflation basket. Analysts anticipate flooding to raise consumer prices in July and August by 0.2 percentage points, which would cause price levels to exceed 2 percent.

Rainfalls are particularly heavy in the summer following an El-Niño event as in 1998 and this summer. Seasonally, heavy rainfalls tend to amplify downside risks, which often results in negative impact on economic growth in the third quarter, unless the government chooses to intervene with stimulus measures.

Indeed, a longer-term Keynesian stimulus can boost post-flood construction support repairs and rebuilding. If 1998 is any guideline, July and August could be hit by an adverse impact, but offset by rebound in September.

From adaptation to mitigation

Recurring floods increase vulnerability of the poor, particularly small farmers. Since the 1998 floods, there has been great progress in adaptation to weather shocks, while government subsidies support agricultural insurance in China. Moreover, climate adaptation has been incorporated into the national agriculture development program.

Yet, reinforcing agricultural resilience is like trying to repair a plane’s engine in air after the take-off. As weather shocks grow more severe, agricultural insurance premiums are soaring and national initiatives must cope with adverse global trends.

In addition to agricultural resilience, sustainable urbanization would go a long way not just to support adaptation but also to contribute to mitigation. According to some estimates, more than 100 Chinese cities are affected by annual floods, which also threaten more than 640 cities. Flooding-related economic losses soared to $300 billion between 2000 and 2014.

To fight flooding and mitigate its costs, the government is conducting sponge city pilots in some 16 major urban centers, including Beijing, Shanghai and other key cities. The goal is to retrofit existing drainage systems or build sponge cities, which excel in flood control and water conservation.

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Contributors

Dr Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among all major advanced economies and large emerging economies. In addition to advisory activities (www.differencegroup.net), he is affiliated with India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, please see http://www.differencegroup.net/. Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

Nouriel Roubini, a.k.a. “Doctor Doom”, is chairman of Roubini Global Economics and professor of economics at New York University’s Stern School of Business. Roubini has been consistently cited as one of the world’s top global thinkers. This year, he was voted as the most influential economist in the world by Forbes magazine.